Interest rate cuts are finally coming. The “When” is still up in the air, but the bond market and interest rate futures contracts are all signaling lower rates in the September to December period. Lower interest rates being paid by the Treasury as a risk-free rate of return should make dividends more attractive. After all companies get heavily penalized for cutting dividends. Some companies will even be raising their dividends.
One sector that always carries a high degree of interest rate sensitivity is the Real Estate Investment Trusts (REITs) sector. Owning land isn’t cheap, and operating it is also quite expensive. Oggonomics is singling out some of the larger REITs with dividends that should be more attractive than their peers in a rate-cutting environment. One attribute has to be dividend coverage, but another attribute is that the stocks of these dividend payers had to be hurt by higher interest rates. The two REITS shown here also do not just out-yield the 10-year Treasury. They have higher yields than the 30-year Treasury Bond!
It is tempting to take the cynical view Jerome Powell and the Federal Reserve have become so used to higher rates that there is no way they will cut rates right before the election. On the reality side, the financial markets are forecasting that the next move in rates is lower. And Jerome Powell even fessed up in Jackson Hole on August 23 — “The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks.”
So, which REIT dividends does Oggonomics see as having more upside than peers as interest rates are soon to be heading lower?
CELL TOWERS
Crown Castle Inc. (NYSE: CCI) is the second largest player in the so-called cell tower game with a $8 billion market cap. It is now taxed as a REIT and is only half the size of rival American Tower Corp. (NYSE: AMT). While AMT is up 5% YTD and up 27% from a year ago, Crown Castle is still down 2.4% YTD and up just 13% from a year ago.
One issue to consider is that Crown Castle is also forced to pay a much higher dividend yield than AMT as well. This automatically makes crown Castle more attractive in a rate-cutting scenario — it yields 5.5% now versus 2.9% for AMT. It’s long-term debt-to-equity ratio is also 5 according to FinViz. That translates to a leveraged benefit if and when it can borrow at lower rates to fund operations.
At $112 now, its 52-week high $119.50 and this was also a $200 stock just three years ago when interest were much lower. The analyst community remains in a lagging position here as this “turnaround” being pressured by activist investors still has a consensus analyst target price of about $111 for the stock.
Crown Castle should be a big winner when rates start heading lower. Higher rates have been expensive for this operator as the Alexandria “REIT” has a share price of $121 that is still down 10% from its 52-week high.
ALSO READ: 2 BIG UTILITY DIVIDENDS TO THRIVE WHEN RATES ARE CUT!
REITS ON HEALTH
Alexandria Real Estate Equities, Inc. (NYSE: ARE) screens out as an “Office REIT” in the S&P 500, but it calls itself a “best-in-class, mission-driven life science REIT making a positive and lasting impact on the world.” It is focused on life science mega campuses in the major areas surrounding Boston, the San Francisco Bay Area, Research Triangle, San Diego, Seattle, Maryland, and New York City. Alexandria has a total market capitalization of $34.4 billion and an asset base in North America of 74.1 million SF as of March 31, 2024, and this had reached a $200 share price before interest rates skyrocketed.
Alexandria Real Estate shares are down more than 4% YTD and up only about 3% from a year ago, making it the second worst-performing S&P REIT of 2024. Its dividend yield is about 4.2%, just above the 30-year Treasury, and its debt-to-equity ratio is just 0.7 according to FinViz.
This REIT was able to maintain and grow its dividend during COVID and the current $1.30 dividend is up 30% in the last 5 years. Is the market overlooking this one or just punishing it worse than others? Maybe both because downgrades and lower target prices were issued by Wedbush, Evercore ISI, BofA and Jefferies after earnings this summer, but the stock is actually up from when the downgrades were made.
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